Ambito Financiero
Bondholders: Argentina requested a new hearing (21 March )
Monday, February 4, 2013
Argentina played its last card before the Court of Appeals for the Second Circuit in New York before the upcoming hearing on February 27, based on a range of different defense, contractual, and legal arguments as well as those based on its capacity to pay. The main novelty in the brief is that they are requesting a new hearing dated March 31 on which the government aims to present a broader series of oral arguments without a time limit.
The brief presented on Friday is well reasoned and professional and is enshrined in Argentina’s strategy to seek what we call “a complete victory over Griesa” to then be in a position to consider the possibility of launching a third swap in the term of the bonds issued in the 2010 debt operation with the same haircuts. This is an “all or nothing” strategy in the sense that it does not include either a phased payment schedule or a partial one (pari passu on account), nor an explicit offer of a new swap in this instance.
It is now taking an essential financial issue which is the so-called “inability to pay”, meaning the lack of resources to make the payment of the sentence of US$1.4 billion, as in this case, it would be followed by claims for over 20 billion dollars for bonds in default in different jurisdictions (Italy, Germany, Switzerland and Japan as well as New York) under the argument of the violation of the pari passu clause contained in the bonds currently in default being negotiated in these locations. Beforehand, the only argument under discussion was the so called “lack of will to pay”, meaning not wanting to pay even when eventually the funds were available. The problem now has perhaps become a state one, in the sense that there are not many more options left other than winning the case. Or continue litigation, without achieving any final sentence until December 31, 2014, the date of expiry of the best creditor clause which forbids payment to the holdouts in conditions that are more favorable than those who accepted the swaps of 2005 and 2010, so that after this date they may have the possibility of offering something different at least to obtain an adhesion rate which will reduce the debt in default.
Also, a swap in the next few months would help, because if Argentina decides not to pay up, as everything seems to indicate, and payment is retransferred to Europe or Argentina, or the terms of the sentences are extended or a non-favorable ruling issued, the chances of the holdouts collecting would continue to be reduced and a swap in these conditions would give them opportunity to recover part of their money plus the coupons tied to growth which would considerably reduce the haircuts. The option of eternal litigation is beginning to lose effectiveness because of the amount in default. If this were “only” US$ 1.4 billion as required to write off the default, that would be one thing, but 20 billion complicates this and effectively makes this option an impossible one.
Additionally, as the government has said in its brief, paying these amounts could activate claims from bondholders who entered the swaps and who added a similar one (these claims could be avoided depending on how the case with the holdouts is managed but there are contingencies in this sense).
New developments: The request for a new hearing. There was a key new development in the trial which involved the attorneys for the parties presenting briefs to the Court requesting a new hearing for October 31st on which they would present oral arguments in greater detail, without time limits, as the February 27 hearing “schedule” has set fixed times for each party to present its case. The award of the request for “oral arguments” is at the court’s discretion and we do not know whether it will concede this or not or merely remain with the discussion concerning the upcoming hearing.
Pari Passu and payment formula: The government alleged that any payment formula which ignores the haircuts imposed on the holders of the swapped bonds does not constitute “equal treatment” as well as being seen as something logical. But they wrote something which could influence the Court: “This court established that the text of the pari passu clause does not require “equal payments” and less so given the way in which these payments are made. The plaintiffs choose the words in the clause that best serve their needs, ignoring the term “equal” without offering any explanation as to how the treatment may be equal when one group of bondholders receives a complete payment while another one is subjected to hair-cuts and payment in quotas during decades.”
Swap: the brief speaks more specifically of the eventuality of a new swap: “As explained by the Republic, the Executive Branch is ready to present Congress with a proposal to treat the holdouts in the same way as those who participated in the 2010 swap. This would be a concrete proposal which would give substance to the concept of equal treatment, as opposed to the special treatment sought by the plaintiffs.
Reserves: the brief refers to the lack of payment when it says that the payment of the sentence would give rise to claims for US$ 43 billion in defaulted and restructured debt. “A sum which is greater than the reserves. This would create legal and financial impossibilities and would only have the aim of creating another crisis. New claims for the pari passu clause have been presented in Germany and New York and Italian Bondholders have indicated that they would do so if they are not successful in the case they have presented before ICSID. These reserves are not to be used to pay off plaintiffs.”
Then there is criticism of Griesa: “In his haste to pass sentence, the lower court judge did not take into consideration either the amount or the effects of a payment equivalent to stripping a country of its reserves.“ A ruling of this nature, it goes on to say, would have the effect of a default on the restructured debt. “But furthermore, payment of the same would activate a wave of claims from 92% of the holders of the restructured debt,” they explain. This is the point of the legal trap which we have mentioned earlier, although certain suppositions must be met according to the best creditor clause. But the contingency exists.
Trust fund and Sovereign Immunity: The brief then examines to contractual and legal aspects that are highly relevant for this case. These are the existence of a trust fund with the Bank of New York and the laws of sovereign immunity of the US: The argument unites these two, alleging that the payments made by the government are made in the Central Bank in Argentina in favor of the trust fund manager and that when the money is placed in this account, it no longer belongs to the country (and may thus not be attached) but is the property of the holders of restructured debt and that any attachment of the payment flow would affect the rights of these investors and affect their constitutional property rights, as well as violating the Uniform Commercial Code of the US, wherein the bank accounts of intermediary agents who are not representing the debtor would be affected).
Excessive injunctions: Regarding the point given above, the brief argues that with respect to the other issue under discussion in this instance (the extension of injunctions to third parties), Griesa’s ruling extends the injunctions to the "the world at large“ violating standards of contractual law and jeopardizing the New York market as a financial center for the liquidation of operations.
Future restructuring: Finally, the brief refutes the assertion that the inclusion of the so called class action clauses (wherein defaulted debt may be swapped with an adhesion rate of between 75% and 85% of the holders, and not the entire number of them, as is the case of the Argentine debt in litigation) would eliminate the holdouts, as, according to the brief, an investor could purchase a sufficient percentage to ensure such majorities are not reached and thus jeopardize the restructurings.
El Cronista
The government stands firm and will not pay the vultures more than the swap offer
Argentina insisted on making payments under the terms of the 2010 restructuring, something that the plaintiffs rejected. It warned of US$43 billion in litigation.
Monday, February 4, 2013
ESTEBAN RAFELE Buenos Aires
The government repeated before the New York court that it is not willing to pay the bondholders with debt in default more than what it paid in the swap of 2010 and finds that any other situation could generate lawsuits against the country for US$43 billion, an amount larger than the reserves of the Central Bank.
It also sought in its filing before the Court of Appeals for the Second Circuit to soften the payments of restructured debt to avoid future attachments like the one from lower court Judge Thomas Griesa, who ordered payment to the fund NML Capital at 100% of its complaint (US$1.33 billion) before continuing with the renegotiated commitments.
Those were the main aspects of the filing the country made before the U.S. court early Saturday morning, in response to the briefs filed by NML and Aurelius (as an amicus curiae) the previous week. Now, the parties will have a hearing on the 27th and then the upper court will issue a ruling that, at a minimum, will order Argentina to pay the plaintiffs as well as those who entered the second round of the exchange.
The appellate court had already accepted the theory of pari passu or equal treatment of the “vulture” funds, by which Argentina is discriminating against the bondholders in default by paying the rest of the debt. And it called on Griesa to set the terms in which that equal treatment should be granted. The judge found that the country had to pay all the debt with NML Capital, the fund of Paul Singer, in cash before continuing the payments of restructured commitments. And that the financial agents that participate in the operation (Bank of New York, the clearing houses and the intermediary banks) would have to retain the payments to satisfy the complaint.
“Any complaint of ‘equal treatment’ should be satisfied by treating the holdouts the same as the (creditors) that participated in the swap offer of 2010,” the government said.
Argentina weighed in heavily in its briefs, put forth by the firm of Cleary Gottlieb Steen & Hamilton under the supervision of Economy Minister Hernan Lorenzino and Finance Secretary Adrian Cosentino, to avoid attachments. The government insisted that the decision by Griesa violates the U.S. law of sovereign immunity, as it attaches assets found outside the United States. The government affirmed that the structure of the trust implies that “the Republic makes restructured debt payments in Argentina” but which the U.S. court cannot attach them. And that the Bank of New York “retains the property that, strictly speaking, is not the country’s.” This position is supported by the briefs filed by the bank and other financial entities. In that direction, bondholders with restructured debt like the fund Fintech filed briefs so that their property was not harmed.
Complaints
For the government, if the court upholds Griesa’s ruling it would open the door to “complaints for more than US$43 billion in payments of amortization and interest on unpaid and restructured debt, an amount superior to all the reserves of the Central Bank (which on Friday totaled US$42.651 billion)”, because some and other bondholders could make use of their pari passu clauses. “This would create a legal and economic impossibility and could have no other purpose but to create another crisis,” the Executive warned. Independent experts believe that a ruling in favor of the vultures would open up complaints for some US$20 billion.
El Cronista
Haircuts that are not forgotten: the bigger the discount, the longer the post-default exile
The markets have a better memory than is believed. A study reveals how haircuts affect the time it take to return to the market. When they are bigger than 60%, the likelihood of remaining excluded for a decade after default is more than 50%
Monday, February 4, 2013
By Laura García, Finance Editor
In a passage from “A Christmas Carol,” Ebenezer Scrooge has a terrifying nightmare: he discovers that in place of his reliable British bonds in reality he has dubious U.S. warrants. There still were no holdouts nor was there talk of vulture funds, but default had already taken place in the 19th century of Dickens.
In the decade of the 1820s alone, all but one of the new independent states of Latin America entered into default. The United States did so in the 1830s and 1840s. In the next decade, not only did Paraguay, Bolivia, Peru and Uruguay stop payment. Egypt and Turkey did as well. By 1890, Argentina and Greece were beginning a tradition that would repeat until our time.
From 1824 to 2004, the world saw various “waves” of default, normally preceded by a credit boom. Latin America knows it first-hand. It led most of those episodes (126), with Africa as a distant second (63 events). Only between 1970 and 2010, there were 180 sovereign restructurings. Countries like Argentina, Brazil and Nigeria were on their backs more than six times in the last decades.
But by frequency or “routine” over the course of history, default always has a cost. At least most of the academic literature about the issue has focused on identifying the “price of default,” while the empirical evidence has gone in a different direction. The penalties always are smaller and short-term. Investors pay little attention to the payment record. The market, as it is always said, has no memory.
Memorious
But some recent studies begin to question that long-held belief that the “market forgives and forgets.” That is the case with “Sovereign Defaults: The Price of Haircuts,” by Juan Cruces, of the Universidad Torcuato Di Tella and Christoph Trebesch, of University of Munich. In it they suggest that in reality haircuts that investors suffer as a consequence of default are not left behind so easily. The bigger the haircut, the greater the post-default cost of taking debt (bond spread) and the longer the period of exclusion from the market. In other words, the Argentina haircut of 77% in 2005 is not the same as the Uruguayan one of 10% in 2003. Haircuts, event when they represent a considerable relief in the short term – end up being paid for.
According to the paper, the average haircut is 37% but it’s been rising over time. While in the 80s the average loss that the investor assumed was 25%, in the two following decades it was around 50% (in the Iraq restructuring of 2006 it reached 89.4%). This is due in large part to the 80s being a more common time for pure restructurings, which only meant an extension of time and not a reduction in face value. In total, between 1970 and 2010, there were 123 of the first kind and 57 of the second. In the second group, the haircuts are larger, on average 65%.
At the same time, countries with high haircuts (above the average) experienced post-restructuring spreads 200 basis points higher than those that apply more moderate haircuts. Also, with haircuts above 60%, the likelihood of still being outside the market a decade after default is more than 50%.
With the withering front
Exclusion from the market is perhaps the most clear sign of the reputational cost of default. Twelve years after its own, Argentina remains repudiated while Bolivia went back to issuing debt after almost a century and Paraguay debuts on the global market with yields below 5% for bonds at 10 years in both cases. Countries like Zambia and Angola also made their first international emission this year, which also saw the return of Guatemala and Aruba to the debt market.
Perhaps the magnitude of the haircuts – and a market somewhat more memorious than was supposed – partly explain the duration of these periods of exile that follow default. In “Sovereign Defaults and the Political Economy of Market Re-access,” Mauro Alessandro, of MIT, Guido Sandleris, of Universidad Torcuato Di Tella, and Alejandro Van der Ghote, of Princeton University, point out that exclusion has varied between 20 years and less than one year. After its default in 1982, for example, the Dominican Republic didn’t return to the market for more than 20 years. Turkey defaulted the same year and returned almost immediately.
One of the main findings of the study, which used a base of data from 1980 to 2000, is that countries either return to the market in the first six years or they have to wait much longer to do so. Variables like the short-term economic situation don’t seem to affect the exclusion period in a significant way. Nor, curiously, does the presence of an IMF program.
In turn, countries with low political risk have more chances to return quickly to the market by being perceived as more capable of implementing necessary fiscal policies to guarantee future payments. After three years in default, only 30% of politically stable economies remain outside the market. But the percentage hits 75% among the unstable ones.
Things have changed since Scrooge’s days. While academics still try to understand the laws that govern the world of sovereign restructurings, the vulture funds hone their techniques to take out slices from defaults. Paul Singer, the owner of Elliott Management, wakes up startled thinking that in place of his Argentine bonds he had ultra-secure and low-yielding German bonds instead.
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